Defining Expected Gains and Losses
Expected gain can be considered as the growth in value of an unfulfilled asset or investment, such as an unsettled stock position. Expected loss, in turn, may be perceived as a decrease in the worth of continuing investment. It seems reasonable to note that expected gains and losses are realized upon the sale of an investment. After providing the above definitions, the essence of liabilities and assets within the scope should be revealed.
In accounting, liabilities are defined primarily by past business transactions, occurrences, sales, exchanges of goods or services, or whatever may offer an economic advantage in the future. Liabilities are recorded as opposite assets. Current liabilities are a firm’s commitments due during a year or a typical operational cycle.
Long-term (noncurrent) liabilities are commitments on the balance sheet that are not due within the next year (Hayes, 2022). Given this, it does not seem that expected loss meets the definition of a liability. Moreover, an asset can be seen as a resource that has economic worth that a person, firm, or state owns or manages with an understanding that it is to produce future benefits. Hence, the expected gain does not entirely meet this definition.
Contingent Liabilities and Assets in Accounting
However, expected losses and gains are related to contingent liability and contingent assets. A contingent liability is a responsibility or prospective loss that may occur in the future based on the result of a specific occurrence. Contingent liability includes potential litigation, product warranties, and ongoing investigations, among other things.
A contingent asset is a benefit associated with some future occurrences largely out of a firm’s control. For instance, Company A has filed a patent infringement case against Business X. If Company A has a reasonable probability of winning the lawsuit, it has a contingent asset. Generally, this prospective asset will be stated in the financial statement but will not be recognized as an asset until the litigation is resolved.
It should also be noted that gains and losses are to be included in a company’s financial statements accordingly. This is visible from Apple’s consolidated statements of comprehensive income. Its net income in 2022 was $99,803 million, but considering its total other comprehensive income/loss, it was $88,531 million (Apple Inc., 2022). Such a difference comes from various factors, from shifts in foreign currency translation to changes in unrealized gains/losses on tradable debt securities.
At this point, it seems rational to claim that accountants treat the depicted aspects differently. This is mainly due to the essence of gains and losses. Both are realized from the sale of an asset, but the former is taxed, and the latter can only be deducted. Nevertheless, expected gains and losses are subject to fluctuation but might reduce one’s tax liability.
Financial Reporting and Regulatory Frameworks
The following should be mentioned within the scope of authoritative literature dealing with gains and losses. These company gains and losses may be found directly in its financial statements. The regulatory framework in which these statements exist is established by the Financial Accounting Standards Board (FASB) (Kenton, 2020). It sets accounting standards for US public and private enterprises and organizations.
The Governmental Accounting Standards Board (GASB) is a similar institution that establishes guidelines for state and municipal governments. In recent years, the FASB and the International Accounting Standards Board (IASB) have collaborated to produce globally consistent accounting rules. Further discussion may focus on how such organizations affect the performance of companies worldwide, as well as how this influence is manifested in practice.
References
Apple Inc. (2022). Form 10-K. [Data set]. Web.
Hayes, A. (2022). Liability: Definition, types, example, and assets vs. liabilities. Investopedia. Web.
Kenton, W. (2020). What is the Financial Accounting Standards Board (FASB)? Investopedia. Web.